Grassley on Tax Inversions, Finance Committee Hearing Statement Print Share

For Immediate Release
Jul 22, 2014

Statement of Senator Chuck Grassley
Committee on Finance Hearing, “The U.S. Tax Code: Love It, Leave It or Reform It!”
Tuesday, July 22, 2014

Like most of my colleagues here today, I have deep concerns about the practice of companies moving overseas for the primary purpose of avoiding U.S. taxes.   Average Americans and companies that remain in America are rightfully outraged when companies leave the United States, leaving the rest of us to foot the bill.   

That’s why in the early 2000s I led an effort to prevent companies from simply setting up a filing cabinet and a mailbox overseas to escape millions of dollars of federal taxes.  In 2004, as chairman of this committee, I was successful in enacting reforms that established rules governing inversions for the first time.  

Under these reforms, an inverted company continues to be treated as a domestic company unless there is a significant change in ownership or substantive business activities are located in the foreign country.  A second feature of these reforms prevents an inverted company from skipping town without first paying taxes on untaxed earnings and appreciated assets.

Prior to these changes, all a company had to do to move its tax home out of the United States was fill out and file papers with a tax haven of its choice.   There were no rules or standards for determining whether a transaction had substance or was purely a tax avoidance scheme.   

A number of companies took advantage of the lack of rules and standards to move their companies to tax havens, such as the Cayman Islands and Bermuda.   These inversions were purely paper transactions, with no substantive change in the current business operations of the U.S. corporation or its foreign subsidiaries.  

The 2004 provisions have successfully curtailed the abuses targeted by the legislation.  As the non-partisan Congressional Research Service has said, these reforms “effectively ended shifts to tax havens where no real business activity took place.”

This is not to say that inversions no longer take place.   

The 2004 reforms were never intended to establish a “Berlin Wall” that forever trapped companies in the United States regardless of business needs.   These reforms were targeted at, and put an end to, egregious abuses epitomized by the Ugland House, which serves as the mailbox headquarters of thousands of corporations.   

The inversions currently in the news mainly involve a large U.S. multi-national merging with a significant, though smaller, foreign company located in a European country.  These are not the traditional tax haven countries with little or no corporate tax, but major U.S. trading partners with competitive tax systems and rates.   

There is little question that lowering one’s tax bill continues to be a factor in companies’ deciding to invert.  However, unlike the transactions in the early 2000s, these are substantive transactions that come with both risks and benefits for the companies involved.  As a result, factors other than taxes likely play a role in deciding whether to enter the transaction.       

I do not condone the behavior of inverting to shirk one’s tax obligations in the United States.  To the extent these transaction are nothing more than a tax play, they should not be tolerated.

One area that should be studied further is the role tax rules that allow inverted companies to strip income out of the United States play in a company’s decision to invert.   Reforms to curtail such abuses should be considered to protect the U.S. tax base and reduce the incentive to invert.  Ideally these reforms would be done alongside tax reform, though I recognize recent inversion activity has sparked a sense of urgency on the part of some of my colleagues.
 
However, corporate inversions are a symptom of much deeper structural problems with our outmoded and anti-competitive corporate tax code.  We must tackle tax reform if we are to put an end to corporate inversions.

Building an ever taller wall in our tax code to keep companies in the United States as called for under the President’s proposal is not a solution.   Such a proposal will only reduce the attractiveness of the United States for domestic and foreign investment.  It may also have the unintended consequence of making U.S. firms targets for acquisition by foreign companies.   This could result in a loss of American jobs and damage our economy.    

The fact is we live in increasingly global world.  This is a reality that we cannot fight by erecting barriers in our tax code.  We need a tax code that recognizes the realities of the 21st century.  We need a competitive tax code that makes American business want to stay here and foreign business want to come here.

With that, I would like to ask Mr. Stack a couple quick questions:  Treasury recently informed me that it has finally begun work on a report mandated by the American Jobs Creation Act to study the 2004 anti-inversions provisions.  When does the Treasury Department expect to finish its study of the 2004 inversion?  Before enacting such important legislation, shouldn’t Treasury at least complete the report mandated to study this issue?

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